Is IAS12 too difficult to apply and understand? Essay

International Accounting Standards 12 continues to receive numerous criticisms on applicability and usefulness of numbers in accounting for corporate income taxes. The argument presented is that the standards set by IAS 12 are too hard to apply or even understand. In the plight of these criticisms, two accounting standards boards, UK’s (ASB) and Germany’s (GASB) opted to conduct a proactive project plan aimed at fundamentally reviewing the standards set by IAS 12 prove hard to solve through piecemeal amendment. Their main agenda was to look at critical issues of accounting for corporate income in an attempt to develop a discussion paper on the principles of IAS 12 and set out proposals. IAS 12 prohibits companies to give an account to deferred taxes by using the deferral method based on the income statement. It instead prefers the passive methodology based on the balance sheet. In addition to the above requirement, the standard requires corporations to acknowledge eithe r a deferral tax liability. Thirdly, IAS 12 requires recognition of deferred tax assets when it is certain that a corporation possess revenues in future to realize deferred tax asset. For instance, given that a company has a history of losses it will recognize deferred tax assets to the extent that taxable temporary expenses in amounts are sufficient. â€Å"Fourthly, IAS 12 does not allow asset credit and delayed tax liabilities brought about by types of material goods and liabilities whose books vary in amounts at the moment of acknowledgment† (IAS – 12). The other requirement is that IAS 12 prohibits recognition of deferred tax liabilities, and those liabilities encountered or arising from adjustments for conversion so long as it satisfies two conditions: * The main investor is capable of controlling the timing of reversal’s temporary difference. * It is certain that impermanent variation may become irreversible in the near future. Therefore, it is a requirement of the company to disclose information concerning cumulative amount of temporary variation involved. Further, IAS 12 recommends explicitly to adjustments to a fair value of assets and liabilities arising from a dual business combination. It however prohibits recognition of deferred tax liabilities because of initial recognition of good will. During revaluation of assets, IAS 12 allows and requires a corporation to recognize deferred tax liabilities in case revaluation of asset takes place. Moreover, IAS 12 requires that valuation of assets and deferred tax liabilities based on tax consequences that may arise in a manner that a company expects to recover the amount. â€Å"The standard also prohibits the deduction of deferred tax assets and liabilities to account for its current value† (Kirk, 2005). The IAS 12 further prohibits companies from making distinctions between the current and non-current assets and liabilities in its financial reports. It also provides restrictive conditions on debit and credit balances that represent deferred tax assets that could be compensated. This requirement is based on the requirements as stipulated by the financial assets and liabilities IAS 32, financial instruments disclosure and presentation. It is worth noting that among the new information IAS 12 requires disclosure include: * That for every class of impermanent disparity; * The amounts of assets and tax liabilities recognized and the amount of expenses or income labeled in the income statement with respect to discontinued operations, the realization of deferred tax asset depends on future prospects over the profits coming from reversals of existing impermanent parities. There has been a rise in criticism on financial reporting for income taxes from users and preparers. The criticism is based on the implication of the current and future effects it will have on cash flows. In their arguments, the users cite accounting requirements as too complex to apply in working out income tax. â€Å"In addition, the principles underlying IAS 12 standard exhibit numerous exemptions that finally compromise on its principles and requirements. Some users also argue against the notion that the principles underlying IAS 12 is flawed† (JORGE, 2008). However, they believe that the principles of IAS 12 are good but face a number of limitations arising from different a nd complex jurisdictions governing the various taxes in different parts of the world. â€Å"Due to these and other complexities, surrounding the applicability of IAS 12, there is a need to examine in reality the requirements of the principle is hard to apply in financial accounting and reporting† (Gupta, 2005). First, there is a need to examine significant improvements that can be incorporated to allow flexibility in application due to incompatibility with the various jurisdictions. To understand issues surrounding IAS 12, there is a need to understand problems cited as a limitation to its application. It is important to note that users and preparers believe that the requirements in IAS12 are unsatisfactory in certain aspects. In addition, users of financial reports do not find information courtesy of IAS 12 useful. In fact, complexity of taxes within corporations makes it quite difficult to assess its impact and prescribes suitable management strategies. As a result, clear and transparent information that is not adequately provided by IAS 12 prepared financial statements. â€Å"The standard seems to concentrate on extensive disclosures focusing on accounting technicalities relating to temporary differences rather than on aspects of real concern, for instance, current and future tax cash flows† (Greuning, 2011). The requirements provided by IAS 12 appear too difficult to apply in practice since they are unclear. Its relevance and understandability of information provided by the standard according to preparers is questionable. In the plight of these limitations, IAS 12 has proved hard to apply and understand and therefore a number of issues need to be addressed to make it better. Several strategies can be incorporated to address the limitations in the IAS12. * Amendments â€Å"Some amendments can be adopted to fix the limitations present in IAS 12 standard† (Everingham & Kana, 2008). These would address particular issues such as the current unsatisfactory requirements and disclosures provided in financial reports prepared under IAS 12. This strategy will protect the main principles of IAS 12. * Develop a new accounting standard- This is on different principles from the present IAS 12 standard. It is vital to note that developing an entirely different approach to accounting pose a considerable challenge. This is because developing a new approach that matches the standards of IAS 12 can take time but limited amendments can save credible amount of time and result in less disruptive time for change and complete replacement. The main question that users should ask to concern IAS 12 is whether the limitations should be addressed through limited amendments or by simply developing an entirely new standard that is based on different principles away from that which is addressed by IAS 12. In view of these strategies, some preparers disagree with the proposed changes. â€Å"This is because they believe that the limitations contemplated in the IAS 12 were not as serious to justify the expenses and efforts† (Delaney, 1985). Some amendments need change for instance; the current IAS 12 brings confusion in the relationships between the tax paid and current tax expense as reported in the income expense. In order to address the inefficiencies, the following questions need answers: * Should there be additional disclosures in IAS 12? Moreover, will these disclosures help in solving the misunderstanding between the taxes paid and current tax expenses? * â€Å"Should strategies on tax accommodate user information needs?†(Choi, 2001) * If a new standard different to IAS 12 was to be adopted in preference to amending it, will the new system deliver up to the expectation of income tax determination? Will the new approaches pose a challenge when it comes to implementation? It is important to note that, the use of IAS 12 is a complex affair since the users have limited knowledge on the limitations and intrigues surrounding its use on tax issues and end up struggling using the information as it is without caution and end up messing. Moreover, dealing with the challenges is not a straightforward venture. Uncertainty of taxes in financial statements is of utmost interest to users and is therefore more interested on how to reflect tax risks in financial reporting. In addition, IAS 12 neither provides explicit guidance nor gives specific disclosures on accounting for uncertain tax positions. â€Å"It only gives provisions that current tax liabilities at the amount expected to be paid tax authorities using the tax laws enacted at the balance sheet date on rates specified for different nations. This implies that the amount recognition is based on estimates owed or realized† (Balthazar, 2011). Conclusion In conclusion, IAS 12 has numerous loopholes that should not be ignored. This is because it creates a large gap between the requirements as suggested by IAS 12 standard as compared to what is needed by users for purposes of predicting future tax cash flows. These user needs may not be met through additional disclosures in financial statements rather other parts of company report may be used to provide a secure location for that kind of information. References: BALTAZAR, E. (2011). 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